Friday, 24 February 2012

Ryanair announced on Tuesday 21st February that it was not proceeding with plans to launch four new routes from it's Edinburgh Base which it announced a few weeks ago citing being unable to agree a competitive cost base, as a result it is reducing the base fleet from 7 to 6 Boeing 737-800s.

However deeper analysis suggest that the carrier may be leveraging its position at Edinburgh as the BAA narrows the bidding process into the second round of bidders ahead of the sale as directed by the Competition Authority.

The airline indicated it may reduce the base fleet further in the winter as negotiations continues to extend the five year base deal from October 2012, and in the medium term hinted that RAF Leuchars could have potential as a joint civil-military airport.

Thus the carrier has flexibility to deploy the aircraft where they can earn the highest rate of return (Existing or New Bases), as the model matures like Southwest Airlines, they will use a mix of primary and secondary airports.

A key trend for the airline is the rising cost of fuel which accounted for 41% of the cost base in Q2 versus 38% in 2010 thus putting pressure to further reduce non-fuel unit costs, as consolidation will create opportunities to reduce airport unit costs.

The carrier is mirroring the low-cost retail model using economies of scale as passenger volumes grow from 73 million to 75 million, thus extracting unit cost reduction from suppliers (Airports) as existing 156 airports on its network actively compete against each other for traffic and routes, the on-going consolidation process within the EU will accelerate this competitive tendering process, to extract unit cost reduction.

The Edinburgh dispute highlights the carrier obsession to drive airport unit costs, as it is a cost line with scope to achieve significant savings given multiple airport suppliers, given current fuel costs at $123 per barrel and as Ryanair fuel hedges unwind (It indicated €350 million fuel cost challenge for FY2013), it is highly unlikely that EdinburghAirport will be the only airport put under the spot light ahead of the Winter 2012 Schedule.